The West has its eye on Vladimir Putin’s weak spot
With the help of carefully selected loyalists, Putin has established three circles of power: the state, state-owned corporations, and “private” companies owned by Putin loyalists. The process began during his tenure as chairman of the Federal Security Service, from 1998 to 1999, when he wielded control over the secret police.
But it was Putin’s first term as president, from 2000 to 2004, that amounts to a true masterpiece of power consolidation. First, in the summer of 2000, he took charge of Russian television. Next, he established control over the state administration and regional administrations, as well as the judicial system. And then, in the 2003 parliamentary election, Putin gained solid control over both upper and lower houses of the Russian legislature. At the pinnacle of state power, the Security Council, he installed three KGB generals: Sergei Ivanov, Nikolai Patrushev, and Aleksandr Bortnikov.
To strengthen the second circle of his power, Putin seized control over state corporations one by one, beginning with Gazprom in May 2001, by appointing loyalists as chief executives and chairmen. The three top managers of state-owned companies are Igor Sechin of Rosneft, Aleksei Miller of Gazprom and Sergei Chemezov of Rostec. Putin clinched his authority over the state sector in 2007, during his second term, with the creation of vast corporations that have since expanded substantially, with cheap state funding, often securing monopolies in their industries.
The third circle of power comprises Putin’s most powerful cronies — the top four appear to be Gennady Timchenko, Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov — and their companies. Their behavior is usually viewed as kleptocratic, though Putin has used his legislative authority to ensure that many of their dubious activities are technically legal. For example, cronies are entitled to buy assets from state companies at discretionary prices and fill government procurement orders with no competition.
The system Putin has created is strikingly similar to the czarist system, in that he has concentrated executive, legislative and judicial powers in his own hands. But in the absence of credible property rights, wealthy Russians, including Putin’s own cronies, know that the only safe places to keep their assets are abroad. This has naturally created a fourth circle of power, over which Putin has no control: offshore tax havens. And those havens are no longer as secure as they once were.
The Russian president appears to be at the height of his powers, but his enemies know that assets held overseas by the oligarchs who support him are vulnerable to seizure.
With the Financial Action Task Force having reduced bank secrecy in Switzerland and cleaned up the many small island tax havens, there are two major remaining destinations: the US and the UK, both of which permit anonymous currency inflows and allow asset owners to hide their identity. In the US, tens of billions of dollars move through law firms’ opaque bank accounts each year, facilitating money laundering.
Western governments do not exert much control over such activities within their borders. In fact, while the assets of Putin’s cronies in the US and the European Union are supposed to be frozen, according to the sanctions imposed after Russia’s annexation of Crimea in 2014, hardly any have been found.
It is time to change this, by initiating comprehensive investigations into the assets of sanctioned people. The US and the UK, which presumably hold the vast majority of Russian offshore wealth, must also catch up with most of Europe by prohibiting the anonymity of beneficiary owners. The US should also proscribe the use of attorney-client privilege to transfer anonymous or dirty money into the country.
Progress may be on the horizon. A new bill, which US president Donald Trump signed into law this month, calls for far-reaching investigations within 180 days into “senior foreign political figures and oligarchs in the Russian Federation” — including “spouses, children, parents, and siblings” — and their assets.
As the veteran liberal Russian politician Leonid Gozman says: “To judge from the statements of our propagandists, the Russian state is very valuable,” but it is also “a very fragile construct that can be destroyed by anything,” from the fight against corruption to efforts to oust kleptocratic officials. Given the vast stocks of Russian capital that have piled up in New York, London, and elsewhere, the West is ideally positioned to exploit this fragility.
• Anders Aslund is a senior fellow at the Atlantic Council in Washington, DC, and is currently writing a book on Russia’s crony capitalism.
© Project Syndicate 2017
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